Buy now/pay later firms brush off Capital One's ban

Capital One contends point of sale credit transactions are too risky to support, but competitors believe it's credit card debt that's falling out of favor with consumers.

Capital One is the first major financial institution to push back on buy now/pay later credit. In doing so, the financial institution lumping the three different BNPL business models together, each of which have different levels of risk and time duration.

“Capital One has made the decision to not authorize transactions identified as point of sale loans charged on its credit cards, regardless of the point of sale lender, a Capital One spokeswoman said in an email to PaymentsSource. “Customers who leverage these platforms using their debit card or checking account are not impacted by this decision.”

Competitive reactions to Capital One’s move has been muted as most don’t see it as a factor.

“This has had an extremely marginal impact, the very vast majority of our consumers use debit and it's a tiny amount use credit, and if they do, they do for a specific reason,” said Aoife Houlihan, vice president global communications and public policy at Klarna. “We have contacted any consumers impacted and provided solutions to them. We don't see any real impact for the future or any plans.”

For the last several years consumers, particularly millennials and Gen Z, have been adopting BNPL products in lieu of amassing credit card debt or simply because they are unable to qualify for a credit card. Pioneers such as BillMeLater (now PayPal Credit), Swedish firm Klarna and Affirm have enticed millions of consumers with short-term BNPL products that often offer low or no interest rate loans. Affirm has filed for an IPO which could value the company at more than $10 billion.

However, in the past two to three years adoption of another BNPL product commonly known as “Pay in 4” promoted by the Australian BNPL provider Afterpay has caught on, with competitors rushing in with similar products. PayPal, for example, launched its own Pay in 4 product in August.

The Pay in 4 model promotes responsible lending since consumers have a very limited time to pay it off, unlike credit cards that can be revolved almost endlessly. Consumers typically use their debit cards or bank accounts for payment as a means to even out cash flow and avoid accumulation of credit card debt. The Pay in 4 model charges 25% of a transaction at time of purchase to the consumer’s checking account or payment card. The remaining 75% of the transaction is then charged in three biweekly installments. The cost to the consumer is typically free and the merchant pays a small interchange fee. For merchants, it allows them to access consumers who don’t own credit cards or want to use them, giving them a larger customer prospect pool.

There is a third BNPL product in the marketplace promoted chiefly by Splitit, which leverages a consumer’s open to buy on their existing credit card.

“We have been made aware of Capital One recently announcing that it would stop 'buy now pay later' transactions on its credit cards,” said Brad Paterson, CEO of Splitit. “This change does not apply to Splitit as the company does not issue point of sale loans. Splitit utilizes a shopper’s existing credit card, issued by banks and financial institutions. This position appears to be targeting BNPL platforms that do make POS loans and enable the use of credit cards to repay that debt. Splitit will continue to process Capital One transactions.”

Afterpay debuted in the U.S. in 2018, followed by launches in the U.K. in 2019 and Canada in 2020. Afterpay reported in November that it now has more than over 13 million customers in the U.S. and that it’s sales in the U.S. during November reached A$1 billion (about $750 million), over triple its November 2019 sales of A$300 million (about $222 million).

Almost 90% of Afterpay's U.S. customers use a debit card to make their payment installments, demonstrating that using its BNPL Pay in 4 product helps consumers make purchases, often large or unscheduled, that can still fit within their biweekly cash flow.

“Capital One’s decision has impacted a small percentage of Afterpay customers and many have already chosen to add an alternative payment method to their account,” said Amanda Pires, vice president communications at Afterpay. “It should be noted that Capital One's decision does not impact debit cards, which the vast majority of our consumers use to make payments. We will continue to engage with Capital One regarding their decision.”

PayPal, which has been performing extremely well as a result of consumers flocking to its products during the pandemic and has recorded stellar financial results in the last few quarters, was even more blunt in its response to the Capital One decision.

“The announcement by Capital One does not impact our PayPal Credit product as payments for PayPal Credit balances can only be made via bank account" ACH, said Joe Gallo, director communications at PayPal.

Affirm declined to comment for the story.

The COVID-19 pandemic has driven many consumers to online shopping and those lacking credit cards or simply not wanting to add to any existing balances have begun to adopt BNPL. U.S. consumer credit growth has slowed as credit card balances have shrunk with revolving credit declining for the seventh time in the last eight months. The level of outstanding revolving consumer credit balances have declined to $979.6 billion at the end of October, a fall to almost 2016 levels, according to the Federal Reserve Bank.

So while the move by Capital One to ban BNPL transactions on its credit cards may be in an effort to reduce risk for its business and its customers, it comes at a time when the payments at point of sale are undergoing a quick-paced evolution.

In a PaymentsSource PayDirt podcast recorded and released in November, Alex Fisher, Afterpay’s vice said “The general phenomenon of buy now pay later is resonating with younger consumers around the world.”

And a PaymentsSource study called the Future of Money found 38% of all U.S. consumers felt having access to a short-term (two- to three-month) BNPL product was critical or very important to them in order to enable a purchase online or in-store. Regarding Gen Z the figure rose to 48% and for millennials it was 56%.